In the race for sales against Shein, H&M expands its premium customer base

During Paris Fashion Week, American pop icon Cher, Swedish singer Robyn, and South Korean DJ Peggy Gou performed at the Silencio nightclub in front of audiences including actors, celebrities, and a lineup of models from Jared Leto and Elle Fanning to Irina Shayk. According to Coresight Research, Shein is currently the world’s largest fast fashion retailer with an estimated market share of 18%.

They all wore H&M outfits. It was a collection by the late fashion designer Paco Rabanne, a pioneer in using metal chains and sequins in fashion in the 1960s, with H&M. The event, organized by the Swedish fashion retailer, brought together many stars, aiming to promote ambitious shoppers to increase revenue and stay away from direct competition with the fast-fashion giant of the populous country – Shein.

The rapid growth of the online retailer established by China is due to extremely low-priced products: a dress for $8, a T-shirt for $5, and jewelry for $2, driving the growth of this industry.

According to Coresight Research, Shein is currently the world’s largest fast fashion retailer with an estimated market share of 18%, followed by Zara owner Inditex with 17% and H&M with 5%. Furthermore, Shein is threatening players in their core area: their app has more users in Europe than in the US, according to Data.ai. And the number of monthly active users has doubled to 65.5 million since January 2022.

Adil Shah, portfolio manager at Storebrand in Oslo, a company holding H&M shares, said: “There is no doubt that Shein is a highly disruptive brand. They have entered the market and developed very rapidly, which has certainly surprised H&M.”

H&M’s revenue decreased by 4% in the fourth quarter, compared to Zara’s 7% revenue growth in the most recent quarter. As inflation pushed costs higher last year, H&M raised prices slower than Zara because their customer base is generally more price-sensitive. But this year, price increases and discount reductions helped the company increase its operating profit margin to 5.9% in the first nine months of the fiscal year from 3.9% in the same period last year.

Alistair Wittet, portfolio manager at Comgest in Paris, said H&M, Gap, and other traditional fashion brands are losing market share to Shein, but Zara is less directly threatened because their customers are more educated. Wittet said, “I would be very surprised if Zara lost market share in the coming years. But there is no doubt that Shein will grow faster, and Zara will continue to outperform the apparel industry in general.”

To attract more ambitious shoppers, H&M is following in the footsteps of its Spanish competitor, which has successfully enhanced its image through store upgrades and marketing.

Investors seem optimistic that H&M can achieve a 10% operating profit target by 2024 – the company’s shares have risen nearly 60% this year, outperforming Inditex. However, Zara’s parent company is valued higher than H&M.

Shah, at Storebrand, said H&M is also trying to bring new collections to market faster to better compete with Zara and brands like Shein. Barclays analyst Nicolas Champ said H&M’s Rabanne collection is trying to differentiate itself by enhancing its brand and expanding its fashion portfolio, making the market much more competitive.

H&M added that sustainable designs are not a pricing issue. However, the prices of these products are much higher than the average.

The collection includes an aluminum mesh dress for $749, a sequin mini dress for $399, purple sequin pants for $299, and silver cowboy boots for $399. RBC analysts said that price increases may make it harder for H&M to compete, but they are pushing forward with their premium brand operations and marketing. This stimulates demand for high-priced designs.